Sports Stocks Down in August Though Betting Firms See Light

Sports stocks drifted lower in the month of August with the rest of the stock market, but improving sentiment around sports wagering, coupled with better-than-expected earnings, reversed the fortunes of some beaten-down names.

The Sportico Sports Stock Index eased 5% in August, ending at 1,221. Trading action largely reflected the broad pullback in stocks in the month after two straight strong months opened the summer.

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Just 10 of the 40 companies in the sports index posted gains in August, led by Super Group (SGHC), which rallied 25% after posting better-than-expected second quarter earnings. The Betway parent tallied $381 million in revenue and 6 cents per share net income. Unlike many other well-known sports wagering companies, Betway’s business continues to be almost totally outside the U.S. Management saw strong growth in Africa, the U.K., Spain and Canada, with the exception of Ontario; Canada’s most populous region enjoys strong betting competition which crimped Betway’s results there. Super Group has operations in nine U.S. states, but says its strategy is to pursue a slow, multiyear build up in the country so it does not get overextended.

“Sports betting by nature is a very hard business, because the customer acquisition [cost] is very high and the revenue is low margin relative to the gross transaction value, so you need to be very good in tech and marketing efficacy,” Oppenheimer & Co. equity analyst Jed Kelly said.

Those cost dynamics have made many investors skeptical of sports wagering stocks for much of the past two years. However, even with the fact that five of the eight betting stocks in the Sportico index declined in the month, investors appear to be viewing at least some of the companies in the space with more enthusiasm.

“From our conversations, investor sentiment around [sports betting] names is the best it’s been since 2020,” said Kelly. “You’re seeing these companies start to exhibit that they can become sustainable, profitable models.”

In particular, DraftKings (DKNG) and FanDuel appear to be benefitting from their technology, according to Kelly. DraftKings actually declined 5% in August, but remains up 166% in 2023. FanDuel is part of Flutter Entertainment, which will begin trading on a U.S. exchange later this year. Flutter shares traded in London are up 31% this year.

Casino and sportsbook operator Rush Street Interactive (RSI) was the second-biggest index gainer in the month, up 20% after reporting better-than-expected earnings to start the month. Its sports book operations outside of New York were all profitable. When adding in New York, which has 51% tax on sports wagers, Rush Street lost $1 million across all its sports book operations.

Betting companies that arguably are lagging on the technology front, such as Penn Entertainment (PENN), continue to see headwinds in the market. Penn is down 20% year-to-date after falling 9% in August. The company enjoyed only a brief spike four weeks ago when it partnered with ESPN to rebrand its sportsbook operations from Barstool Sports. Penn gave up on its star-crossed Barstool partnership to start the month, selling the business back to founder Dave Portnoy for $1 and booking a loss of up to $850 million.

While there is improving sentiment in sports wagering, the market could see more volatility, given that some names have relatively few stocks available to trade, like Super Group. That lack of liquidity tends to amplify the effect of good and bad news on shares. Also, sports betting companies as a whole need to draw in more institutional investors, according to Kelly.

“The key for high growth OSB stocks such as DraftKings, is if they can attract more traditional high growth [telecom media and technology] investors,” he said.

Outside of sports wagering, most sports stocks declined in August, led by sports-focused streaming service Fubo (FUBO, down 31%), football-themed real estate operator Hall of Fame Resort & Entertainment (HOFV, down 28%) and data and analytics operator Sportradar (SRAD, down 22%).

The Sportico Sports Stock Index debuted in August 2020 as the first barometer of the sports business, reflected in the stocks of 40 companies reliant on sports for their growth. The index includes publicly traded sport steams, broadcasters, apparel and gear makers, and other suppliers. August was the fourth month in 2023 the index has declined, though overall the index is up 16% in 2023.

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